Self Funded vs Fully Insured vs Level Funded Plans

Self Funded vs Fully Insured vs Level Funded Plans

August 10, 2021
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When it comes to group health insurance, there are three types: fully-insured, self-funded, and level-funded.   A fully-insured plan removes most of the risk from the employee and employer and puts it on the insurance carrier. The cost of the plan is typically higher.  In a self-funded program, the company provides all the funds for the medical claims. The monthly premiums are based on multiple factors with the anticipation of covering all the plan's needs (administration, claims and stop loss coverage).  A level-funded plan is when the employer makes a set payment each month that goes into a reserve account for claims, admin costs, and premiums for stop-loss coverage. If claims are lower than expected, the remaining payments may be refunded at the end of the policy contract. 

With average premiums for families increasing by 22% in the last 5 years, employers look for ways to control group health insurance costs. Understanding what it means to be “fully-insured” vs self-funded or level-funded is imperative to ensuring that employers offer the best health insurance packages to their employees and control costs. 

Once again, when it comes to group health insurance, there are three types: fully insured, self-funded, and level funded.  Let's dig into the details.


Key Takeaways

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  • In a fully-insured plan, you (the employer) purchase insurance from an insurance company, and it takes the risk of liability.  This plan is typically the most expensive of the three.

 

  • In a self-funded plan, you set aside some of your own money to mitigate risk.  This plan offers a higher chance of savings.

 

  • A level-funded plan combines the fully-insured and self-funded plans.  You make set payments to an insurance company or third-party per month, which creates a reserve fund for liabilities that arise.  At the end of the contract, you may be refunded surplus payments.

 

  • Premiums for fully-insured plans are determined by adding anticipated claims cost, administrative fees, applicable taxes and stop-loss coverage.

 

  • In a fully-insured plan, you might see an increase in premium, based on the insurance company’s revenue.

 

  • You determine your premium for a self-funded plan based on an analysis of your company. 

 

  • A level-funded plan tends to work the best for small groups made of healthy individuals.  

 

  • Level-funded plans are not available in every state due to stop-loss regulations.

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In a nutshell:

  • A fully-insured plan removes the risk from the employee and employer and puts it on the insurance carrier. The cost of the plan is typically higher.  
  • A self-funded plan puts most of the risk on the employer. It offers a higher chance of savings. In some cases, the possibility of a credit at the end of the plan year based on the claims of the group.
  • Level-funded is a combination of the two.  Think of a self-funded plan with training wheels. The employer will not have the financial risk at the end of the plan year, but may or may not receive a credit.

We will take a deeper look at each of these options. 



Fully-Insured Plan

A fully-insured plan removes most of the risk from the employee and employer and puts it on the insurance carrier. The cost of the plan is typically higher.  

When you think of “insurance” you are thinking of “fully-insured.” The individual or employer pays a premium to the insurance carrier and in return, the insurance carrier is responsible for paying future medical claims that are covered by the policy and beyond a certain annual “out-of-pocket maximum.”  


A fully-insured plan example:



How your premium is determined

Premiums for fully-insured plans are determined by adding anticipated claims cost, administrative fees, applicable taxes and stop loss coverage. These premiums are set for a specific amount of time, typically a 12-month period, and there are no additional variable costs. The size of the group also has an effect on premiums.

  • Small group (less than 50 employees) premiums are “community rated.” All groups with fewer than 50 employees in the same geographic area pay the same premium.
  • Mid-size group (50 to 100 employees) premiums are based on several factors, including age of employees and dependents, type of coverage offered, previous claims data, etc.
  • Large group (100+ employees) premiums are also based on claims history, size of the group, age of employees, number of dependents covered, etc.

For instance, a family's out of pocket maximum may be $5,000. A dependent has his tonsils removed with a claims cost of $10,000. The father has open heart surgery for $500,000. The family is responsible for $5,000. The insurance carrier covers the remaining $505,000 without increasing the monthly premium during the contract period.  

If the medical costs are more than the premium or claims are trending higher than the premium, community rating or risk pooling comes into play.   

Think of your community pool and all the people out for a swim. While your son just had his tonsils out, and your husband had heart surgery, the family next to you might be having a healthy year with minimal claims.  The family across the way has had a few sinus infections but no other major claims.  These claims' factors are ‘pooled’ together to create a community rating. This spreads the risk equally amongst all enrolled with a carrier in a specified region. 


What happens when you renew your plan

The insurance carrier must make enough money each year in premiums to cover the cost of the claims. If the carrier determines that medical costs are exceeding the premiums collected, you will see an increase in premium. You have no control over these increases and often do not receive detailed information as to the reasoning behind the increase.

  • Small group increases are based on the “pooled risk” of all individuals enrolled in the same plan. That means there is no consideration of the health of a group. While your group may be healthy with very few claims, another group may be much sicker and contributing to the increase in claims disproportionately. None of that matters, however, and all groups will be charged the same increase.
  • Mid-size group increases also consider the pooled risk but will take into consideration the group’s overall health. If your group is healthy and has what the carrier determines to be average or below average use of the plan, you could see more stable rates with limited increases.
  • Large group increases consider pooled risk as well as the cost of claims for your group. The carrier will evaluate all health and prescription drug claims, pointing out high dollar claims and the overall cost of your plan. Some groups with below average use may receive decreases in premium while groups with high dollar claims will see increases.

Carriers will also evaluate plan designs each year and make changes. This may include increases to deductibles, coinsurance, copayments and out-of-pocket maximums. A fully insured group will need to determine if the current plan design is still working for employees or if a new plan will need to be selected.

Plan design changes can affect premiums as well. A richer plan with lower out-of-pocket maximums and copays may increase premiums, while implementing a higher deductible´╗┐ plan could save you money.

 


Self-Funded Plan

Take fully-insured and do the opposite. In a self-funded program, the company provides all the funds for the medical claims. The monthly premiums are based on multiple factors with the anticipation of covering all the plan's needs (administration, claims and stop loss coverage). 

The employer will typically buy stop-loss coverage from an insurer to protect themselves from large claims. The employer will pay a premium for protection in case the actual claims exceed the predicted expenses. For example, if the actual claims exceed by 25%, then this protection would cover the remaining costs.  

Self-funded plans are often not an option for smaller employers. The fewer the employees the harder it is to predict the costs of claims.  And in many cases, small employers are not prepared to have funds readily available to cover large claims. 


A self-funded example:



What is covered

Self-insured plans are flexible in their design. Benefits can be customized by the group but must follow ERISA, a sweeping federal law that ensures employees are offered certain benefits, such as continuation of coverage when they terminate their employment.

Often, groups hire a third-party administrator (TPA) to help them analyze and manage the plan. This can include setting and collecting premiums, creating an effective plan design, paying claims and managing stop-loss.

Because employers want to limit claims costs, many self-insured plans also include wellness benefits such as programs to quit smoking, encourage weight loss and manage chronic illness.

Learn how to make the most of your self-funded plan by implementing one of these wellness programs, or even addressing sick days for remote employees! 

Additionally, keeping happy employees can help limit claims.  Here are some ways to boost company culture.


How your premium is determined

The first two things to consider when you decide to fund your own claims are current plan design and claims costs. A complete analysis will help determine the correct premium.

You will also need to evaluate your fixed costs versus variable costs.

  • Fixed costs include administrative fees, stop loss coverage and any other set fees charged per employee.
  • Variable costs include health care claims.


What happens when you renew your plan

Self-insured plans don’t technically “renew” every 12 months, but there is an evaluation of the plan to make sure it’s meeting expectations; costs are adjusted as needed. Here are a few factors that can affect premiums.

  • Claims: As you are funding your own claims, it’s important to calculate the amount of premium collected vs. costs. If you have had an increase in claims costs, premiums will need to increase. If you saw a decrease in claims costs, premiums may be adjusted. However, it is important to continue to build a reserve to cover unexpected expenses.
  • Provider network: The plan contracts with a provider network each year to offer employees access to providers. You will need to evaluate whether the current network is sufficient. If changes are made, premiums may be affected.
  • Stop loss coverage: Typically, self-insured plans do not assume 100 percent of the risk for high dollar or catastrophic claims. You will buy stop loss insurance to cover these unexpected expenses. At renewal, you will examine claims from the previous 12 months to determine if the stop loss amount must be increased. At the same time, rates will be set by the carrier to cover unexpected losses and allow for changes in your employee population.